Thread by @may27capital

As a part of "behavioral biases in #investing ", today we will talk about Sunk cost fallacy. Time for a short thread 🧵

Imagine u were hungry and in mood for some good food. So u order a burger and pizza. After eating the burger and 2 slices of Pizza u feel full. But to justify the price u paid, u forcefully finish the pizza. That's Sunk cost fallacy. Enough of food coma. Lets get into #Investing

Sunk cost fallacy in #investing can be defined as the tendency of people sticking to their investments just because they spent a lot of time, efforts and money on them. We keep adding more to losing investments just because we already invested a lot.
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Behavioral economist Richard Thaler first coined the sunk cost fallacy in 1980. There was a popular belief that people made rational economical decisions based on relevant factors called prospective costs.
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But Thaler challenged this and said that people also consider bygone factors ( time and money invested) while making a investment decision.
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Markets are forward looking. Every #investment we make today is a bet on how the company performs in future. It's growth, earnings, sectoral tailwinds and returns of your portfolio are all mere investment thesis. There is a good chance that they wont pan out like u expected!
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#Investors are reluctant in accepting their thesis has gone wrong and made a bad decision. Changing ur mind is a sign of progress, not failure. Exiting bad investments is seen as a sign of failure by investors, but in reality it's a rational decision that will save u money!
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“Subjective confidence in a judgement is not a reasoned evaluation of the probability that this judgement is correct. Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it.”
Thinking, Fast and Slow by Daniel Kahneman.
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Investors should try the following to avoid Sunk cost fallacy while investing:

✅Keep tracking your investments
✅Timely check if the fundamentals are intact
✅Are there better opportunities than the losing investments you hold?
✅If yes book loses and reinvest proceeds in those

Invest based on the merits and prospects of business, but not how much time and money you spent on them!
End of thread!

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https://twitter.com/may27capital/status/1451058068708413443